Euro blows against Ukraine intensify ECB migraine

European Central Bank President Christine Lagarde attends a news conference following a meeting of the Governing Council in Frankfurt, Germany February 3, 2022. Michael Probst/Pool via REUTERS/

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LONDON, March 4 (Reuters Breakingviews) – The fall in the euro will worsen the already difficult political situation of European Central Bank President Christine Lagarde. The Eurozone economy is more exposed than other regions to the fallout from Russia’s invasion of Ukraine and the ripple effects of sanctions, which explains the fall in the single currency. Its widespread slide will make imports more expensive and exacerbate high inflation.

On Friday, the euro fell below $1.10 for the first time in nearly two years and was on course for its biggest daily percentage decline since March 2020, a time of massive demand for dollar funding. as Covid-19 hit the West. Something similar is happening again, making the greenback generally strong. An indicator of funding stress in global financial markets, the spread between the three-month U.S. forward interest rate and the three-month overnight indexed swap rate just hit its highest since May 2020. But this time, Europe’s single currency is also showing independence weakness: It slid to its lowest level in seven years against the Swiss franc and its lowest level since 2016 against the pound sterling.

There are good reasons. Europe had close trade ties with Russia, so war and sanctions will inflict damage on Eurozone exporters and its business supply chains. In 2021, Russia was the fifth-largest partner for EU goods exports and the third-largest for EU goods imports, according to the European Commission. Germany, Europe’s largest economy, was both the country’s largest importer of goods and the largest exporter of goods. The single currency bloc was also more heavily dependent on Russian energy than other regions. And geographical proximity is a decisive negative element for sentiment following a Russian assault on the Zaporizhzhia nuclear power plant, the largest in Europe.

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For Lagarde, the reasons for the decline of the euro are less important than the consequences. A falling currency makes imports more expensive as inflation just hit a record high of 5.8%, almost three times the ECB’s target. The problem is all the greater since the price of oil, denominated in dollars, is already soaring. The expected efforts to control inflation would come at the expense of economic activity, while a change of course to support the economy could prolong the pressures on prices. She can’t win.

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BACKGROUND NEWS

– The euro fell against other major currencies on March 4 as Russia’s invasion of Ukraine threatened to damage Europe’s economic prospects. The single currency fell to $1.0884, the weakest since May 2020, and hit a seven-year low of 1.0024 Swiss francs.

– The euro also lost ground against the pound, falling to 82.29 pence, its lowest level since 2016.

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Editing by Richard Beales and Pranav Kiran

Sign up for a free trial of our full service at https://www.breakingviews.com/trial and follow us on Twitter @Breakingviews and at www.breakingviews.com. All opinions expressed are those of the authors.

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